IP Expenses

IP Has Defensive and Offensive Value, Even If Not Used

Like the castles of bygone eras, IP is among the most valuable strategic asset a modern corporation can have in its arsenal to not just survive, but thrive in a competitive environment. And, like a kingdom's system of castles, a strong portfolio of IP assets can provide great value to a company, both defensively and offensively, even if it is not actually used.

A company can derive great strategic value from a strong IP portfolio, not only from the benefits of protecting the company's foundational technology, but also from the design freedom that such a portfolio can provide. Design freedom may require not just the protection of the foundational technology, but also protection of incremental improvements to that technology. Employing such a strategy at the conceptual stages of a product can allow the creation of a proverbial moat around the product so that competitors are effectively prevented from thwarting the company's further enhancement and commercialization of its products. Without such protection around a key product line, the company may be at risk of blocking patents that may be procured by competitors down the road and that can be asserted against the company, leaving it vulnerable to judgments and injunctions that could wipe out years of R&D and marketing investments. The company could also be at risk from a competitor employing a “picket-fence” strategy that patents improvements on the company's foundational technology as a set-up for a forceful cross-licensing situation.

A strategically significant IP portfolio can also provide great value by deterring, or minimizing, litigation that may be asserted against the company so that it can have unfettered access to the market. Many industries today are patent-intensive, and other competitors may already have significant IP assets that may be asserted against the company. Before a suit is brought, however, the competitor must weigh the possibility of a countersuit. If the possibility of a countersuit is high, or there is greater potential liability from a countersuit than from the competitor's claims, then it would be imprudent for the competitor to file or threaten suit against the company. This silent but powerful threat of a countersuit may prevent many lawsuits from even coming to fruition, and may provide the company free access to even a patent-intensive market.

Investment in a significant IP portfolio can also provide benefits that directly impact the bottom line, apart from the royalties that can be extracted from that portfolio. If a patent portfolio is difficult to circumvent, then it could be used to push out competitors from the marketplace, or to prevent additional competition from taking place in the marketplace. This should have a direct impact on the profits that a company generates. In certain industries, such as pharmaceuticals, competitors expect to be sued if they enter a market with infringing products that are protected by patents. Unless a substitute can be found, competitors may be effectively deterred by this threat from selling competing products.

IP As a Long-Term Investment

R&D and IP should be viewed as two sides of the same coin, and like companies' views on R&D, IP expenses should be viewed with a long-term investment perspective. Many companies spend a great deal of capital on R&D, the benefits of which are usually not realized during the period in which those expenditures are incurred. Most companies instinctively understand that R&D expenses are necessary long-term investments in the future of their products ' and even their corporate existence. The modern marketplace is characterized by constantly changing technology and product development due to the ever-changing preferences of consumers. Companies must keep pace in this fiercely competitive business environment, and they need to innovate, or perish. Management must effectively protect the investment in R&D in order for companies to protect their investments and realize the fruits of their innovations. But the return on investment in IP by developing and enforcing IP assets may take years to bear fruit. This is because developing a strong enough patent portfolio that can be deployed strategically against competitors in an industry often takes years of investment in procurement, licensing negotiations and policing, and even years of litigation should those negotiations fall through. But the strategic value that can be garnered from a strong IP portfolio is worth the investment ' and the wait.

Leading Companies Understand The Importance Of IP

Although patent trolls may have grabbed most of the headlines in regard to IP issues of late, this is a more recent development. Historically, leading businesses have understood the importance of IP, and those companies continue to make investment in IP a priority. In fact, almost 75% of the value of publicly traded companies in the United States comes from IP assets, up from around 40% in the early 1980s. Around $45 billion is collected annually in the U.S. from technology licensing alone; $100 billion is collected worldwide, and that figure is rapidly increasing.

It is no wonder then that the leading U.S. companies continue to invest in IP, and have continued to do so even during this economic downturn. IBM was issued the most patents in 2008, and is the the first organization to break the 4,000 patent barrier in one year with a new all-time high of 4,186 issued patents, up 33% over 2007. Microsoft was issued 2,030 patents, up 24% over the previous year and 400% since 2003, while Intel and Hewlett-Packard were issued 1,776 and 1,424 U.S. patents, respectively. The list of companies that were issued the most patents also includes Broadcom and Cisco, both up 21% over 2007.

It's not just leading U.S. companies that make significant investments in IP, but leading foreign companies as well. Companies such as Samsung, Sony, NEC, Infineon and Hitachi are at the top of the list of companies that are awarded the most patents in any given year. Clearly, these companies understand the importance of having a substantial patent portfolio to protect their hard-won space in the U.S. market.

The leading companies also understand the importance of the enforcement of IP rights when there is encroachment. Intel, the semiconductor industry giant, has been one of the most active patent litigants since 1997, with involvement in almost 6.5% of all patent suits in the semiconductor industry. Qualcomm is another example of a leader in its field of technology that has vigorously protected its innovations and actively enforced its IP, and now reaps significant rewards. Through its active enforcement of its dominant IP position in CDMA, Qualcomm has been able to impose on the entire wireless industry a unique two-tiered royalty system for licensing its core CDMA technology to both chip-makers and cell phone manufacturers that use either Qualcomm or another vendor's chips.

Conclusion

Companies should view IP the way kings of old viewed their system of castles and other fortifications. Some castles were built as a display of strength of the sovereign, to deter attacks on the kingdom and hold ground during battle, if not to support advancement. So too it is with IP. Over the long term, investment and active enforcement of IP can yield substantial rewards that will directly impact the bottom line by enhancing a company's market position. Building IP castles can be expensive, but failing to undertake that expense could prove in the long run to be even more costly.

Great kings of old thought it wise to spend their precious treasure constructing a network of castles and other fortifications. This construction was an investment considered crucial to the security of the kingdom: Castles provided protection during invasion by an enemy, or could be used as bases for offensive operations against enemy territory. The designs of these buildings included moats, drawbridges, crenellations and arrow slits, and the presence of these features intimidated enemies and discouraged attacks on the fortifications and kingdom at large. Castles were also built as a display of the sovereign's prestige and strength. Even though the chancellor might have begrudged the expense of such construction, the money was spent.

For today's corporations, IP assets function in much the same way as a king's castles. But the expenses necessary to procure IP assets and enforce IP rights may not get the same respect or receive the same priority from many corporate budgets, particularly those seeking ways to cut costs during tough times. In-house counsel today are faced with a quandary: IP procurement and enforcement costs are increasing at a time when corporate law departments are under pressure to reduce costs, especially spending on outside counsel. The root of this dilemma is that IP assets are increasingly (and justifiably) seen as key to corporate success and a potential profit center, yet the expenses of monetizing those assets (including protecting hard-won market space) are still typically treated as Selling, General and Administrative Expenses (“SG&A”) rather than as part of “costs of good sold.” In other words, in-house lawyers can do great good for their companies by deploying IP assets to realize direct monetary return for their companies, but they are under more pressure to reduce expenses because of the inaccurate perception that IP-related expenses do not add to the bottom line, a perception that stems from accounting conventions.

The bottom line is that whatever their formal accounting treatment, IP expenses should not be treated as overhead. IP assets should be viewed as strategic assets of a company that can be deployed defensively to protect the company's investments, or offensively to increase revenue and margins. In light of the strategic importance of IP, shouldn't corporate decision makers weigh the costs and benefits of IP procurement and enforcement campaigns with the same rigor and focus that they consider for a product launch?

IP Has Defensive and Offensive Value, Even If Not Used

Like the castles of bygone eras, IP is among the most valuable strategic asset a modern corporation can have in its arsenal to not just survive, but thrive in a competitive environment. And, like a kingdom's system of castles, a strong portfolio of IP assets can provide great value to a company, both defensively and offensively, even if it is not actually used.

A company can derive great strategic value from a strong IP portfolio, not only from the benefits of protecting the company's foundational technology, but also from the design freedom that such a portfolio can provide. Design freedom may require not just the protection of the foundational technology, but also protection of incremental improvements to that technology. Employing such a strategy at the conceptual stages of a product can allow the creation of a proverbial moat around the product so that competitors are effectively prevented from thwarting the company's further enhancement and commercialization of its products. Without such protection around a key product line, the company may be at risk of blocking patents that may be procured by competitors down the road and that can be asserted against the company, leaving it vulnerable to judgments and injunctions that could wipe out years of R&D and marketing investments. The company could also be at risk from a competitor employing a “picket-fence” strategy that patents improvements on the company's foundational technology as a set-up for a forceful cross-licensing situation.

A strategically significant IP portfolio can also provide great value by deterring, or minimizing, litigation that may be asserted against the company so that it can have unfettered access to the market. Many industries today are patent-intensive, and other competitors may already have significant IP assets that may be asserted against the company. Before a suit is brought, however, the competitor must weigh the possibility of a countersuit. If the possibility of a countersuit is high, or there is greater potential liability from a countersuit than from the competitor's claims, then it would be imprudent for the competitor to file or threaten suit against the company. This silent but powerful threat of a countersuit may prevent many lawsuits from even coming to fruition, and may provide the company free access to even a patent-intensive market.

Investment in a significant IP portfolio can also provide benefits that directly impact the bottom line, apart from the royalties that can be extracted from that portfolio. If a patent portfolio is difficult to circumvent, then it could be used to push out competitors from the marketplace, or to prevent additional competition from taking place in the marketplace. This should have a direct impact on the profits that a company generates. In certain industries, such as pharmaceuticals, competitors expect to be sued if they enter a market with infringing products that are protected by patents. Unless a substitute can be found, competitors may be effectively deterred by this threat from selling competing products.

IP As a Long-Term Investment

R&D and IP should be viewed as two sides of the same coin, and like companies' views on R&D, IP expenses should be viewed with a long-term investment perspective. Many companies spend a great deal of capital on R&D, the benefits of which are usually not realized during the period in which those expenditures are incurred. Most companies instinctively understand that R&D expenses are necessary long-term investments in the future of their products ' and even their corporate existence. The modern marketplace is characterized by constantly changing technology and product development due to the ever-changing preferences of consumers. Companies must keep pace in this fiercely competitive business environment, and they need to innovate, or perish. Management must effectively protect the investment in R&D in order for companies to protect their investments and realize the fruits of their innovations. But the return on investment in IP by developing and enforcing IP assets may take years to bear fruit. This is because developing a strong enough patent portfolio that can be deployed strategically against competitors in an industry often takes years of investment in procurement, licensing negotiations and policing, and even years of litigation should those negotiations fall through. But the strategic value that can be garnered from a strong IP portfolio is worth the investment ' and the wait.

Leading Companies Understand The Importance Of IP

Although patent trolls may have grabbed most of the headlines in regard to IP issues of late, this is a more recent development. Historically, leading businesses have understood the importance of IP, and those companies continue to make investment in IP a priority. In fact, almost 75% of the value of publicly traded companies in the United States comes from IP assets, up from around 40% in the early 1980s. Around $45 billion is collected annually in the U.S. from technology licensing alone; $100 billion is collected worldwide, and that figure is rapidly increasing.

It is no wonder then that the leading U.S. companies continue to invest in IP, and have continued to do so even during this economic downturn. IBM was issued the most patents in 2008, and is the the first organization to break the 4,000 patent barrier in one year with a new all-time high of 4,186 issued patents, up 33% over 2007. Microsoft was issued 2,030 patents, up 24% over the previous year and 400% since 2003, while Intel and Hewlett-Packard were issued 1,776 and 1,424 U.S. patents, respectively. The list of companies that were issued the most patents also includes Broadcom and Cisco, both up 21% over 2007.

It's not just leading U.S. companies that make significant investments in IP, but leading foreign companies as well. Companies such as Samsung, Sony, NEC, Infineon and Hitachi are at the top of the list of companies that are awarded the most patents in any given year. Clearly, these companies understand the importance of having a substantial patent portfolio to protect their hard-won space in the U.S. market.

The leading companies also understand the importance of the enforcement of IP rights when there is encroachment. Intel, the semiconductor industry giant, has been one of the most active patent litigants since 1997, with involvement in almost 6.5% of all patent suits in the semiconductor industry. Qualcomm is another example of a leader in its field of technology that has vigorously protected its innovations and actively enforced its IP, and now reaps significant rewards. Through its active enforcement of its dominant IP position in CDMA, Qualcomm has been able to impose on the entire wireless industry a unique two-tiered royalty system for licensing its core CDMA technology to both chip-makers and cell phone manufacturers that use either Qualcomm or another vendor's chips.

Conclusion

Companies should view IP the way kings of old viewed their system of castles and other fortifications. Some castles were built as a display of strength of the sovereign, to deter attacks on the kingdom and hold ground during battle, if not to support advancement. So too it is with IP. Over the long term, investment and active enforcement of IP can yield substantial rewards that will directly impact the bottom line by enhancing a company's market position. Building IP castles can be expensive, but failing to undertake that expense could prove in the long run to be even more costly.